Netflix Has a Good Outlook Despite Its Recent Negative Free Cash Flow

InvestorPlace - Stock Market News, Stock Advice & Trading TipsNetflix has a good outlook despite its recent negative free cash flow. NFLX stock might be worth at least 41...

By Mark R. Hake - InvestorPlace

This story originally appeared on InvestorPlace

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

After Netflix (NASDAQ:NFLX) reported its fourth-quarter 2021 earnings on Jan. 21, NFLX stock fell too far. As a result, Netflix is due for a rebound, despite the disappointing outlook it provided for its first-quarter.

the netflix logo displayed on a tablet that a person is holding while laying down
Source: Kaspars Grinvalds /

At first, the stock dropped like a rock to $359.70 on Jan. 26. But by Feb. 1 it rebounded to $457 but since then it has drifted down again. As of March 4, Netflix was down below $400 again to $367.12.

But investors should not get too worried. People won't stop streaming Netflix anytime soon. In addition, there is good news for revenue prospects long term.

Netflix has started raising its prices again. That should help with the disappointing outlook that bothered analysts and pushed NFLX stock down.

Where Things Stand at Netflix

Revenue grew 16% in Q4 from the prior year, but management forecast that in Q1 sales would rise just 10.3%. Not only is that lower than the Q4 growth rate, but it is significantly below the 24% growth rate last year. This is what spooked the market.

Analysts and investors are concerned that the huge amounts of capital that Netflix is spending on content is due to heavy streaming competitors. That implies that the company could be stuck in a negative free cash flow situation for years to come.

For example, free cash flow (FCF) for the quarter was -$569 million vs. -$284 million in Q4"20. Last year its FCF was negative $159, in line with its expectation to be "approximately break-even."

However, Netflix wrote that it expects to make positive FCF during 2022. That means it expects that its quarterly FCF will turn around.

Moreover, the company also predicted that it would be able to reduce its debt outstanding to between $10 billion to $15 billion. This is down from $15.5 billion in gross debt at the end of 2021.

In other words, the slower growth rate Netflix expects at least in Q1 does not translate into lower profits or negative FCF for the full year. So far, the company has been on spot with its guidance, so there is no reason to not believe them.

Where This Leaves NFLX Stock

Analysts are paid to be skeptical and to model out their own forecast for the company. According to Seeking Alpha, the average earnings per share (EPS) forecast for 2022 is $11.17.

This is slightly lower than the $11.24 diluted EPS it made in 2021. It also puts NFLX on a forward price-to-earnings (P/E) multiple of 33 times.

However, for the year ending 2023, the same 35 analysts forecast 31% higher EPS at $14.61. That lowers its forward P/E multiple to just 25 times.

Typically Netflix stock has a very high forward P/E multiple. According to Morningstar, the average forward P/E is over 82 times in the past 5 years. So even at half that rate or 41 times forward EPS of $14.61, the price should be at least $599.01. That represents a potential upside of 63% for NFLX stock.

What to Do

As a result, these analysts are still positive on NFLX stock in terms of their 12-month price targets. The average target price of 42 analysts surveyed by Seeking Alpha is $516.18, or 40% over today's price of $367.12.

A similar result is at which reports that 35 analysts have an average price target of $512.45, or 39% higher. Yahoo! Finance, which uses Refintiv's analyst survey data, reports that 38 analysts had an average target of $510.19 per share. That is 38.6% higher than the price as of March 4.

So, even though my forecast of $599 is higher than most analysts' price targets, NFLX stock still looks like good value.

The bottom line is that Netflix expects that its content spending will attract new growth with its price increase. In short, investors' fears may have been overdone.

On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

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